QUALITY CONTROL FOR AUDIT WORK CONTENTS

Transcription

1 CONTENTS Paragraphs Introduction Audit Firm Individual Audits Appendix: Illustrative Examples of Quality Control Procedures for an Audit Firm 1 International Standards on Auditing (ISAs) are to be applied in the audit of financial statements. ISAs are also to be applied, adapted as necessary, to the audit of other information and to related services. ISAs contain the basic principles and essential procedures (identified in bold type black lettering) together with related guidance in the form of explanatory and other material. The basic principles and essential procedures are to be interpreted in the context of the explanatory and other material that provide guidance for their application. To understand and apply the basic principles and essential procedures together with the related guidance, it is necessary to consider the whole text of the ISA including explanatory and other material contained in the ISA not just that text which is black lettered. In exceptional circumstances, an auditor may judge it necessary to depart from an ISA in order to more effectively achieve the objective of an audit. When such a situation arises, the auditor should be prepared to justify the departure. ISAs need only be applied to material matters. The Public Sector Perspective (PSP) issued by the Public Sector Committee of the International Federation of Accountants is set out at the end of an ISA. Where no PSP is added, the ISA is applicable in all material respects to the public sector. 1 Reference may also be made to the International Professional Practice Statement 1 of the International Federation of Accountants Assuring the Quality of Professional Services

2 Introduction 1. The purpose of this International Standard on Auditing (ISA) is to establish standards and provide guidance on the quality control: policies and procedures of an audit firm regarding audit work generally; and procedures regarding the work delegated to assistants on an individual audit. 2. Quality control policies and procedures should be implemented at both the level of the audit firm and on individual audits. 3. In this ISA the following terms have the meaning attributed below: Audit Firm the auditor means the person with final responsibility for the audit; audit firm means either the partners of a firm providing audit services or a sole practitioner providing audit services, as appropriate; personnel means all partners and professional staff engaged in the audit practice of the firm; and (d) assistants means personnel involved in an individual audit other than the auditor. 4. The audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted in accordance with ISAs or relevant national standards or practices. 5. The nature, timing and extent of an audit firm s quality control policies and procedures depend on a number of factors such as the size and nature of its practice, its geographic dispersion, its organization and appropriate cost/benefit considerations. Accordingly, the policies and procedures adopted by individual audit firms will vary, as will the extent of their documentation. Illustrative examples of quality control procedures are presented in the Appendix to this ISA. 6. The objectives of the quality control policies to be adopted by an audit firm will ordinarily incorporate the following: Professional Requirements 2 : Personnel in the firm are to adhere to the principles of independence, integrity, objectivity, confidentiality and professional behavior. Skills and Competence 3 : 2 Refer to the Code of Ethics for Professional Accountants issued by the International Federation of Accountants and the requirement on auditors to observe these in ISA 200 Objective and General Principles Governing an Audit of Financial Statements. 3 See footnote

3 The firm is to be staffed by personnel who have attained and maintain the technical standards and professional competence required to enable them to fulfill their responsibilities with due care. Assignment: Audit work is to be assigned to personnel who have the degree of technical training and proficiency required in the circumstances. (d) Delegation: (e) (f) There is to be sufficient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality. Consultation: Whenever necessary, consultation within or outside the firm is to occur with those who have appropriate expertise. Acceptance and Retention of Clients: An evaluation of prospective clients and a review, on an ongoing basis, of existing clients is to be conducted. In making a decision to accept or retain a client, the firm s independence and ability to serve the client properly and the integrity of the client s management are to be considered. (g) Monitoring: The continued adequacy and operational effectiveness of quality control policies and procedures is to be monitored. 7. The firm s general quality control policies and procedures should be communicated to its personnel in a manner that provides reasonable assurance that the policies and procedures are understood and implemented. Individual Audits 8. The auditor should implement those quality control procedures which are, in the context of the policies and procedures of the firm, appropriate to the individual audit. 9. The auditor, and assistants with supervisory responsibilities, will consider the professional competence of assistants performing work delegated to them when deciding the extent of direction, supervision and review appropriate for each assistant. 10. Any delegation of work to assistants would be in a manner that provides reasonable assurance that such work will be performed with due care by persons having the degree of professional competence required in the circumstances

4 Direction 11. Assistants to whom work is delegated need appropriate direction. Direction involves informing assistants of their responsibilities and the objectives of the procedures they are to perform. It also involves informing them of matters, such as the nature of the entity s business and possible accounting or auditing problems that may affect the nature, timing and extent of audit procedures with which they are involved. 12. The audit program is an important tool for the communication of audit directions. Time budgets and the overall audit plan are also helpful in communicating audit directions. Supervision 13. Supervision is closely related to both direction and review and may involve elements of both. 14. Personnel carrying out supervisory responsibilities perform the following functions during the audit: Review monitor the progress of the audit to consider whether: (i) assistants have the necessary skills and competence to carry out their assigned tasks; (ii) assistants understand the audit directions; and (iii) the work is being carried out in accordance with the overall audit plan and the audit program; become informed of and address significant accounting and auditing questions raised during the audit, by assessing their significance and modifying the overall audit plan and the audit program as appropriate; and resolve any differences of professional judgment between personnel and consider the level of consultation that is appropriate. 15. The work performed by each assistant needs to be reviewed by personnel of at least equal competence to consider whether: the work has been performed in accordance with the audit program; the work performed and the results obtained have been adequately documented; all significant audit matters have been resolved or are reflected in audit conclusions; (d) the objectives of the audit procedures have been achieved; and (e) the conclusions expressed are consistent with the results of the work performed and support the audit opinion

5 16. The following need to be reviewed on a timely basis: the overall audit plan and the audit program; the assessments of inherent and control risks, including the results of tests of control and the modifications, if any, made to the overall audit plan and the audit program as a result thereof; the documentation of the audit evidence obtained from substantive procedures and the conclusions drawn therefrom, including the results of consultations; and (d) the financial statements, proposed audit adjustments and the proposed auditor s report. 17. The process of reviewing an audit may include, particularly in the case of large complex audits, requesting personnel not otherwise involved in the audit to perform certain additional procedures before issuing the auditor s report. Public Sector Perspective 1. This ISA refers to the work of private sector audit firms. Many audits of governments and other public sector entities are carried out by Supreme Audit Institutions (SAIs), other bodies appointed by statute or practicing auditors. The general principles in this ISA on quality control apply equally to SAIs. However, some of the specific policies and procedures may not be applicable (for example, acceptance and retention of clients, SAIs organized on a collegial basis) and there may be additional policies relevant to public sector auditors. 2. Also, in the public sector of some countries, quality control generally has a different meaning to that adopted in this ISA. Quality assurance is the term applied to internal supervision and review procedures whereas quality control is the term applied to external quality reviews

6 Appendix Illustrative Examples of Quality Control Procedures for an Audit Firm A. PROFESSIONAL REQUIREMENTS Policy Personnel in the firm are to adhere to the principles of independence, integrity, objectivity, confidentiality and professional behavior. Procedures 1. Assign an individual or group to provide guidance and to resolve questions on matters of integrity, objectivity, independence and confidentiality. Identify circumstances where documentation as to the resolution of questions would be appropriate. Require consultation with authoritative sources when considered necessary. 2. Communicate policies and procedures regarding independence, integrity, objectivity, confidentiality and professional behavior to personnel at all levels within the firm. Inform personnel of the firm s policies and procedures and advise them that they are expected to be familiar with them. Emphasize independence of mental attitude in training programs and in supervision and review of audits. Inform personnel on a timely basis of those entities to which independence policies apply. (i) Prepare and maintain for independence purposes a list of the firm s clients and of other entities (client s affiliates, parents, associates, and so forth) to which independence policies apply. (ii) Make the list available to personnel (including personnel new to the firm or to an office) who need it to determine their independence. (iii) Establish procedures to notify personnel of changes in the list. 3. Monitor compliance with policies and procedures relating to independence, integrity, objectivity, confidentiality and professional behavior. Obtain from personnel periodic written representations, ordinarily on an annual basis, stating that (i) They are familiar with the firm s policies and procedures. (ii) Prohibited investments are not held and were not held during the period

7 (iii) Prohibited relationships do not exist, and transactions prohibited by firm policy have not occurred. Assign responsibility for resolving exceptions to a person or group with appropriate authority. Assign responsibility for obtaining representations and reviewing independence compliance files for completeness to a person or group with appropriate authority. (d) Review periodically the firm s association with clients to ascertain whether any areas of involvement may or may be seen to impair the firm s independence. B. SKILLS AND COMPETENCE Policy The firm is to be staffed by personnel who have attained and maintain the technical standards and professional competence required to enable them to fulfill their responsibilities with due care. Procedures Hiring 1. Maintain a program designed to obtain qualified personnel by planning for personnel needs, establishing hiring objectives, and setting qualifications for those involved in the hiring function. Plan for the firm s personnel needs at all levels and establish quantified hiring objectives based on current clientele, anticipated growth, and retirement. Design a program to achieve hiring objectives which provides for (i) Identification of sources of potential hirees. (ii) Methods of contact with potential hirees. (iii) Methods of specific identification of potential hirees. (iv) Methods of attracting potential hirees and informing them about the firm. (v) Methods of evaluating and selecting potential hirees for extension of employment offers. Inform those persons involved in hiring as to the firm s personnel needs and hiring objectives. (d) Assign to authorized persons the responsibility for employment decisions. (e) Monitor the effectiveness of the recruiting program

8 (i) Evaluate the recruiting program periodically to determine whether policies and procedures for obtaining qualified personnel are being observed. (ii) Review hiring results periodically to determine whether goals and personnel needs are being achieved. 2. Establish qualifications and guidelines for evaluating potential hirees at each professional level. Identify the attributes to be sought in hirees, such as intelligence, integrity, honesty, motivation and aptitude for the profession. Identify achievements and experiences desirable for entry level and experienced personnel. For example: (i) Academic background. (ii) Personal achievements. (iii) Work experience. (iv) Personal interests. Set guidelines to be followed when hiring individuals in situations such as: (i) Hiring relatives of personnel or relatives of clients. (ii) Rehiring former employees. (iii) Hiring client employees. (d) Obtain background information and documentation of qualifications of applicants by appropriate means, such as: (e) (i) Resumes. (ii) Application forms. (iii) Interviews. (iv) Academic record. (v) Personal references. (vi) Former employment references. Evaluate the qualifications of new personnel, including those obtained from other than the usual hiring channels (for example, those joining the firm at supervisory levels or through merger or acquisition), to determine that they meet the firm s requirements and standards. 3. Inform applicants and new personnel of the firm s policies and procedures relevant to them. Use a brochure or other means to inform applicants and new personnel. Prepare and maintain a manual describing policies and procedures for distribution to personnel. Conduct an orientation program for new personnel

9 Professional Development 4. Establish guidelines and requirements for continuing professional education and communicate them to personnel. Assign responsibility for the professional development function to a person or group with appropriate authority. Provide that programs developed by the firm be reviewed by qualified individuals. Programs would contain statements of objectives and education and/or experience prerequisites. Provide an orientation program relating to the firm and the profession for newly employed personnel. (i) Prepare publications and programs designed to inform newly employed personnel of their professional responsibilities and opportunities. (ii) Assign responsibility for conducting orientation conferences to explain professional responsibilities and firm policies. (d) Establish continuing professional education requirements for personnel at each level within the firm. (e) (i) Consider legislative and professional bodies requirements or voluntary guidelines in establishing firm requirements. (ii) Encourage participation in external continuing professional education programs, including self-study courses. (iii) Encourage membership in professional organizations. Consider having the firm pay or contribute toward membership dues and expenses. (iv) Encourage personnel to serve on professional committees, prepare articles, and participate in other professional activities. Monitor continuing professional education programs and maintain appropriate records, both on a firm and an individual basis. (i) Review periodically the records of participation by personnel to determine compliance with firm requirements. (ii) Review periodically evaluation reports and other records prepared for continuing education programs to evaluate whether the programs are being presented effectively and are accomplishing firm objectives. Consider the need for new programs and for revision or elimination of ineffective programs. 5. Make available to personnel information about current developments in professional technical standards and materials containing the firm s technical policies and procedures and encourage personnel to engage in selfdevelopment activities. Provide personnel with professional literature relating to current developments in professional technical standards

10 (i) Distribute to personnel material of general interest, such as relevant international and national pronouncements on accounting and auditing matters. (ii) Distribute pronouncements on relevant regulations and statutory requirements in areas of specific interest, such as company securities and taxation law, to persons who have responsibility in such areas. (iii) Distribute manuals containing firm policies and procedures on technical matters to personnel. Manuals need to be updated for new developments and changing conditions. For training programs presented by the firm, develop or obtain course materials and select and train instructors. (i) State the program objectives and education and/or experience prerequisites in the training programs. (ii) Provide that program instructors be qualified as to both program content and teaching methods. (iii) Have participants evaluate program content and instructors of training sessions. (iv) Have instructors evaluate program content and participants in training sessions. (v) Update programs as needed in light of new developments, changing conditions, and evaluation reports. (vi) Maintain a library or other facility containing professional, regulatory and firm literature relating to professional technical matters. 6. Provide, to the extent necessary, programs to fill the firm s needs for personnel with expertise in specialized areas and industries. Conduct firm programs to develop and maintain expertise in specialized areas and industries, such as regulated industries, computer auditing, and statistical sampling methods. Encourage attendance at external education programs, meetings, and conferences to acquire technical or industry expertise. Encourage membership and participation in organizations concerned with specialized areas and industries. (d) Provide technical literature relating to specialized areas and industries. Advancement 7. Establish qualifications deemed necessary for the various levels of responsibility within the firm. Prepare guidelines describing responsibilities at each level and expected performance and qualifications necessary for advancement to each level, including:

11 (i) Titles and related responsibilities. (ii) The amount of experience (which may be expressed as a time period) generally required for advancement to the succeeding level. Identify criteria which will be considered in evaluating individual performance and expected proficiency, such as: (i) Technical knowledge. (ii) Analytical and judgmental abilities. (iii) Communication skills. (iv) Leadership and training skills. (v) Client relations. (vi) Personal attitude and professional bearing (character, intelligence, judgment and motivation). (vii) Qualification as a professional accountant for advancement to a supervisory position. Use a personnel manual or other means to communicate advancement policies and procedures to personnel. 8. Evaluate performance of personnel and advise personnel of their progress. Gather and evaluate information on performance of personnel. (i) Identify evaluation responsibilities and requirements at each level indicating who will prepare evaluations and when they will be prepared. (ii) Instruct personnel on the objectives of personnel evaluation. (iii) Utilize forms, which may be standardized, for evaluating performance of personnel. (iv) Review evaluations with the individual being evaluated. (v) Require that evaluations be reviewed by the evaluator s superior. (vi) Review evaluations to determine that individuals worked for and were evaluated by different persons. (vii) Determine that evaluations are completed on a timely basis. (viii) Maintain personnel files containing documentation relating to the evaluation process. Periodically counsel personnel as to their progress and career opportunities. (i) Review periodically with personnel the evaluation of their performance, including an assessment of their progress with the firm. Considerations would include the following: Performance. Future objectives of the firm and the individual. Assignment preference

12 Career opportunities. (ii) Evaluate partners periodically by means of senior partner or fellow partner evaluation and counseling as to whether they continue to have the qualifications to fulfill their responsibilities. (iii) Review periodically the system of personnel evaluation and counseling to ascertain that: Procedures for evaluation and documentation are being followed on a timely basis. Requirements established for advancement are being achieved. Personnel decisions are consistent with evaluations. Recognition is given to outstanding performance. 9. Assign responsibility for making advancement decisions. C. ASSIGNMENT Policy Assign responsibility to designated persons for making advancement and termination decisions, conducting evaluation interviews with persons considered for advancement, documenting the results of the interviews, and maintaining appropriate records. Evaluate data obtained giving appropriate recognition in advancement decisions to the quality of the work performed. Study the firm s advancement experience periodically to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. Audit work is to be assigned to personnel who have the degree of technical training and proficiency required in the circumstances. Procedures 1. Delineate the firm s approach to assigning personnel, including the planning of overall firm and office needs and the measures employed to achieve a balance of audit manpower requirements, personnel skills, individual development and utilization. Plan the personnel needs of the firm on an overall basis and for individual practice offices. Identify on a timely basis the staffing requirements of specific audits. Prepare time budgets for audits to determine manpower requirements and to schedule audit work. (d) Consider the following factors in achieving a balance of audit manpower requirements, personal skills, individual development and utilization (i) Audit size and complexity

13 (ii) Personnel availability. (iii) Special expertise required. (iv) Timing of the work to be performed. (v) Continuity and periodic rotation of personnel. (vi) Opportunities for on-the-job training. 2. Assign an appropriate person or persons to be responsible for assigning personnel to audits. Consider the following in making assignments of individuals (i) Staffing and timing requirements of the specific audit. (ii) Evaluations of the qualifications of personnel as to experience, position, background, and special expertise. (iii) The planned supervision and involvement by supervisory personnel. (iv) Projected time availability of individuals assigned. (v) Situations where possible independence problems and conflicts of interest may exist, such as assignment of personnel to audits for clients who are former employers or are employers of certain kin. Give appropriate consideration, in assigning personnel, to both continuity and rotation to provide for efficient conduct of the audit and the perspective of other personnel with different experience and backgrounds. 3. Provide for approval of the scheduling and staffing of the audit by the auditor. D. DELEGATION Policy Submit, where necessary, for review and approval the names and qualifications of personnel to be assigned to an audit. Consider the experience and training of the audit personnel in relation to the complexity or other requirements of the audit, and the extent of supervision to be provided. There is to be sufficient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality. Procedures 1. Provide procedures for planning audits. Assign responsibility for planning an audit. Involve appropriate personnel assigned to the audit in the planning process

14 Develop background information or review information obtained from prior audits and update for changed circumstances. Describe matters to be included in the overall audit plan and the audit program, such as the following: (i) Development of proposed work programs for particular areas of audit interest. (ii) Determination of manpower requirements and need for specialized knowledge. (iii) Development of estimates of time required to complete the audit. (iv) Consideration of current economic conditions affecting the client or its industry and their potential effect on the conduct of the audit. 2. Provide procedures for maintaining the firm s standards of quality for the work performed. Provide adequate supervision at all organizational levels, considering the training, ability and experience of the personnel assigned. Develop guidelines for the form and content of working papers. Utilize standardized forms, checklists, and questionnaires to the extent appropriate to assist in the performance of audits. (d) Provide procedures for resolving differences of professional judgment among personnel involved in an audit. 3. Provide on-the-job training during the performance of audits. Emphasize the importance of on-the-job training as a significant part of an individual s development. (i) Discuss with assistants the relationship of the work they are performing to the audit as a whole. (ii) Involve assistants in as many portions of the audit as practicable. Emphasize the significance of personnel management skills and include coverage of these subjects in firm training programs. Encourage personnel to train and develop subordinates. (d) Monitor assignments to determine that personnel. (i) Fulfill, where applicable, the experience requirements of the relevant legislative, regulatory or professional body. (ii) Gain experience in various areas of audits and varied industries. (iii) Work under different supervisory personnel

15 E. CONSULTATION Policy Whenever necessary, consultation within or outside the firm is to occur with those who have appropriate expertise. Procedures 1. Identify areas and specialized situations where consultation is required and encourage personnel to consult with or use authoritative sources on other complex or unusual matters. Inform personnel of the firm s consultation policies and procedures. Specify areas or specialized situations requiring consultation because of the nature or complexity of the subject matter. Examples include (i) Application of newly issued technical pronouncements. (ii) Industries with special accounting, auditing or reporting requirements. (iii) Emerging practice problems. (iv) Filing requirements of legislative and regulatory bodies, particularly those of a foreign jurisdiction. Maintain or provide access to adequate reference libraries and other authoritative sources. (i) Establish responsibility for maintaining a reference library in each practice office. (ii) Maintain technical manuals and issue technical pronouncements, including those relating to particular industries and other specialties. (iii) Maintain consultation arrangements with other firms and individuals where necessary to supplement firm resources. (iv) Refer problems to a division or group in the professional body established to deal with technical inquiries. 2. Designate individuals as specialists to serve as authoritative sources and define their authority in consultative situations. Designate individuals as specialists for filings with legislative and other regulatory bodies. Designate specialists for particular industries. Advise personnel of the degree of authority to be accorded specialists opinions and of the procedures to be followed for resolving differences of opinion with specialists. 3. Specify the extent of documentation to be provided for the results of consultation in those areas and specialized situations where consultation is required

16 Advise personnel as to the extent of documentation to be prepared and the responsibility for its preparation. Indicate where consultation documentation is to be maintained. Maintain subject files containing the results of consultations for reference and research purposes. F. ACCEPTANCE AND RETENTION OF CLIENTS Policy An evaluation of prospective clients and a review, on an ongoing basis, of existing clients is to be conducted. In making a decision to accept or retain a client, the firm s independence and ability to serve the client properly and the integrity of the client s management are to be considered. Procedures 1. Establish procedures for evaluation of prospective clients and for their approval as clients. Evaluation procedures could include the following: (i) Obtain and review available financial statements regarding the prospective client, such as annual reports, interim financial statements and income tax returns. (ii) Inquire of third parties as to any information regarding the prospective client and its management and principals which may have a bearing on evaluating the prospective client. Inquiries may be directed to the prospective client s bankers, legal advisers, investment banker, and others in the financial or business community who may have such knowledge. (iii) Communicate with the predecessor auditor. Inquiries would include questions regarding the facts that might bear on the integrity of management, on disagreements with management as to accounting policies, audit procedures, or other similarly significant matters, and on the predecessor s understanding as to the reasons for the change in auditors. (iv) Consider circumstances which would cause the firm to regard the engagement as one requiring special attention or presenting unusual risks. (v) Evaluate the firm s independence and ability to serve the prospective client. In evaluating the firm s ability, consider needs for technical skills, knowledge of the industry and personnel. (vi) Determine that acceptance of the client would not violate codes of professional ethics. Designate an individual or group, at appropriate management levels, to evaluate the information obtained regarding the prospective client and to make the acceptance decision

17 (i) Consider types of engagements that the firm would not accept or which would be accepted only under certain conditions. (ii) Provide for documentation of the conclusion reached. Inform appropriate personnel of the firm s policies and procedures for accepting clients. (d) Designate responsibility for administering and monitoring compliance with the firm s policies and procedures for acceptance of clients. 2. Evaluate clients upon the occurrence of specified events to determine whether the relationships ought to be continued. Events specified for this purpose could include: (i) The expiration of a time period. (ii) A major change in one or more of the following Management Directors Ownership Legal advisers Financial condition Litigation status Scope of the engagement Nature of the client s business. (iii) The existence of conditions which would have caused the firm to reject a client had such conditions existed at the time of the initial acceptance. Designate an individual or group, at appropriate management levels, to evaluate the information obtained and to make retention decisions. (i) Consider types of engagements that the firm would not continue or which would be continued only under certain conditions. (ii) Provide for documentation of the conclusion reached. Inform appropriate personnel of the firm s policies and procedures for retaining clients. (d) Designate responsibility for administering and monitoring compliance with the firm s policies and procedures for retention of clients. G. MONITORING Policy The continued adequacy and operational effectiveness of quality control policies and procedures is to be monitored. Procedures 1. Define the scope and content of the firm s monitoring program

18 Determine the monitoring procedures necessary to provide reasonable assurance that the firm s other quality control policies and procedures are operating effectively. (i) Determine objectives and prepare instructions and review programs for use in conducting monitoring activities. (ii) Provide guidelines for the extent of work and criteria for selection of engagements for review. (iii) Establish the frequency and timing of monitoring activities. (iv) Establish procedures to resolve disagreements which may arise between reviewers and engagement or management personnel. Establish levels of competence, etc., for personnel to participate in monitoring activities and the method of their selection. (i) Determine criteria for selecting monitoring personnel, including levels of responsibility in the firm and requirements for specialized knowledge. (ii) Assign responsibility for selecting monitoring personnel. Conduct monitoring activities. (i) Review and test compliance with the firm s general quality control policies and procedures. (ii) Review selected engagements for compliance with professional standards and with the firm s quality control policies and procedures. 2. Provide for reporting findings to the appropriate management levels, for monitoring actions taken or planned, and for overall review of the firm s quality control system. Discuss general findings with appropriate management personnel. Discuss findings on selected engagements with engagement management personnel. Report both general and selected engagement findings and recommendations to firm management together with corrective actions taken or planned. (d) Determine that planned corrective actions were taken. (e) Determine need for modification of quality control policies and procedures in view of results of monitoring activities and other relevant matters